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The Credit Granting Decision

Author

Listed:
  • Harold Bierman, Jr.

    (Cornell University, Ithaca, New York)

  • Warren H. Hausman

    (Cornell University, Ithaca, New York)

Abstract

A series of probabilistic models are formulated for the credit granting policy of a firm. First, a single-period analysis is presented for the two-action problem, "give credit or do not give credit." Then a multi-period analysis for the same problem is presented, showing that the single-period analysis ignores important future benefits. The multi-period analysis contains a Bayesian approach to revisions of the probability of collection as collection experience is gained. The multi-period analysis is modified by adding discounting to reflect the time value of money and a probability that the customer will cease purchasing. Next, a dynamic programming formulation of the multi-period problem is presented, and this formulation is then adapted to include a decision on how much credit to offer. The paper closes with a series of remarks concerning the practical application of the analysis.

Suggested Citation

  • Harold Bierman, Jr. & Warren H. Hausman, 1970. "The Credit Granting Decision," Management Science, INFORMS, vol. 16(8), pages 519-532, April.
    • Handle: RePEc:inm:ormnsc:v:16:y:1970:i:8:p:b519-b532
    DOI: 10.1287/mnsc.16.8.B519
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    Citations

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    Cited by:

    1. Jonathan K. Budd & Peter G. Taylor, 2015. "Calculating optimal limits for transacting credit card customers," Papers 1506.05376, arXiv.org, revised Aug 2015.
    2. Glennon, Dennis & Kiefer, Nicholas M. & Larson, C. Erik & Choi, Hwan-sik, 2007. "Development and Validation of Credit-Scoring Models," Working Papers 07-12, Cornell University, Center for Analytic Economics.
    3. Thomas, Lyn C., 2000. "A survey of credit and behavioural scoring: forecasting financial risk of lending to consumers," International Journal of Forecasting, Elsevier, vol. 16(2), pages 149-172.
    4. Karl Waldmann, 1998. "On granting credit in a random environment," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 47(1), pages 99-115, February.
    5. Gustafson, Cole R., 1989. "Stochastic Dynamic Modeling: An Aid To Agricultural Lender Decision Making," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 14(1), pages 1-9, July.
    6. Ha-Thu Nguyen, 2014. "Default Predictors in Credit Scoring - Evidence from France’s Retail Banking Institution," EconomiX Working Papers 2014-26, University of Paris Nanterre, EconomiX.
    7. Alfonso-Sánchez, Sherly & Solano, Jesús & Correa-Bahnsen, Alejandro & Sendova, Kristina P. & Bravo, Cristián, 2024. "Optimizing credit limit adjustments under adversarial goals using reinforcement learning," European Journal of Operational Research, Elsevier, vol. 315(2), pages 802-817.
    8. Zhixin Liu & Ping He & Bo Chen, 2019. "A Markov decision model for consumer term-loan collections," Review of Quantitative Finance and Accounting, Springer, vol. 52(4), pages 1043-1064, May.
    9. Seifert, Daniel & Seifert, Ralf W. & Protopappa-Sieke, Margarita, 2013. "A review of trade credit literature: Opportunities for research in operations," European Journal of Operational Research, Elsevier, vol. 231(2), pages 245-256.
    10. Li Gan & Roberto Mosquera, 2008. "An Empirical Study of the Credit Market with Unobserved Consumer Typers," NBER Working Papers 13873, National Bureau of Economic Research, Inc.
    11. So, Meko M.C. & Thomas, Lyn C., 2011. "Modelling the profitability of credit cards by Markov decision processes," European Journal of Operational Research, Elsevier, vol. 212(1), pages 123-130, July.
    12. Naveed Chehrazi & Thomas A. Weber, 2015. "Dynamic Valuation of Delinquent Credit-Card Accounts," Management Science, INFORMS, vol. 61(12), pages 3077-3096, December.
    13. Smith, L. Douglas & Lawrence, Edward C., 1995. "Forecasting losses on a liquidating long-term loan portfolio," Journal of Banking & Finance, Elsevier, vol. 19(6), pages 959-985, September.
    14. Margaret S. Trench & Shane P. Pederson & Edward T. Lau & Lizhi Ma & Hui Wang & Suresh K. Nair, 2003. "Managing Credit Lines and Prices for Bank One Credit Cards," Interfaces, INFORMS, vol. 33(5), pages 4-21, October.
    15. Ha Thu Nguyen, 2014. "Default Predictors in Credit Scoring - Evidence from France’s Retail Banking Institution," Working Papers hal-04141336, HAL.
    16. van der Vliet, Kasper & Reindorp, Matthew J. & Fransoo, Jan C., 2015. "The price of reverse factoring: Financing rates vs. payment delays," European Journal of Operational Research, Elsevier, vol. 242(3), pages 842-853.
    17. Shi, Xiaojun & Zhang, Shunming, 2010. "An incentive-compatible solution for trade credit term incorporating default risk," European Journal of Operational Research, Elsevier, vol. 206(1), pages 178-196, October.
    18. Naveed Chehrazi & Peter W. Glynn & Thomas A. Weber, 2019. "Dynamic Credit-Collections Optimization," Management Science, INFORMS, vol. 67(6), pages 2737-2769, June.
    19. Kiefer, Nicholas M. & Larson, C. Erik, 2006. "Specification and Informational Issues in Credit Scoring," Working Papers 06-11, Cornell University, Center for Analytic Economics.
    20. Fourgeaud Claude & Gourieroux Christian & Pradel Jacqueline, 1990. "Sélection de clientèle et tarification de prêt bancaire," CEPREMAP Working Papers (Couverture Orange) 9004, CEPREMAP.

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